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What is a bucket shop?

Bucket shop

The term 'bucket shop' covers a range of establishments in the world of financial services, none of them believed to be especially reputable. The best-known legal definition was given by the US Supreme Court in 1906, describing them as establishments taking bets on asset prices, but not arranging for their purchase or delivery to clients.

Where have you heard about bucket shops?

As it has become an all-purpose derogatory term for fringe financial-services operations, it is unlikely that you will have been able, as an investor, to avoid hearing about them in one context or another. Financial media may warn you away from one or other 'bucket shop'.

What you need to know about bucket shops.

The Supreme Court ruling in Gatewood versus North Carolina - which upheld the constitutionality of a state ban on bucket shops - defined them as, in effect, betting shops taking wagers on the movement of 'stocks, grain, oil, etc, there being no transfer or delivery of the stock or commodities nominally dealt in'.

A slightly different definition has bucket shops as transacting actual stock market business, but doing so in a way as to profit from clients' dealings, taking the best price for itself rather than for the clients. Bucket shops ought not to be confused with boiler-room operations, in which high-pressure sales techniques are used to offload over-priced securities on unwitting customers.

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